A certain source of block liquidity in uncertain times

by Dr. Robert Barnes, Global Head of Primary Markets & CEO Turquoise, London Stock Exchange Group

Dr. Robert Barnes,  London Stock Exchange Group

The coronavirus outbreak and subsequent social and economic restrictions have touched almost every aspect of our lives, including financial markets. During recent volatility, investors have found that cost-effective equity investment can be highly challenging.

To this end, buy-side traders are keenly focused on protecting alpha when implementing investment decisions, as portfolio managers realign their strategies. Alpha protection is always important, but it becomes more urgent – and more difficult to achieve – in times of heightened volatility. Recent evidence suggests buy-side traders are sourcing liquidity more frequently on block trading venues to defend investor interests when price moves are at their most unpredictable.

One way to track the growth of electronic block trading is by comparing trading behaviours in Q1 2020 with the aftermath of the UK’s Brexit referendum in June 2016, comparable in terms of overall volume and volatility. In short, we can see that in 2020, bigger blocks have been executed more regularly, despite uncertain market conditions.

Market volatility during March has sparked the largest volumes traded on Turquoise Plato since the Brexit referendum, with daily volumes reaching approximately €2.1 billion on two occasions this year. But whereas trading on 24 June 2016 saw just 3% of total orders on Turquoise Plato executed via Turquoise Plato Block Discovery, our midpoint block crossing service, has seen a significant increase in activity. More than half of the volume on Turquoise Plato was executed as block trades on both 28 February 2020 and 9 March 2020. Also, notably from this recent period, Turquoise Plato Block Discovery printed three block orders above €20 million.

Much of this difference between 2016 and 2020 trading preferences can be explained by the response of buy-side traders and market operators such as Turquoise, to MiFID II. Through the introduction of the regulation, policymakers effectively directed the market to innovate to trade blocks within new guidelines for transparency and access. When an audience of trading professionals[1] were asked in 2016 how they would adapt to MiFID II in 2018, 51% predicted they would do more block trading, with 46% confirming they were already exploring innovations available on Block Discovery. Working in collaboration with the Plato Partnership, we listened and we executed. 

Historically, blocks were rarely executed in volatile periods because of the risk that the bid/offer spread quoted by the sales trader would widen significantly, leaving the buy-side trader counting the cost of trading away from the touch. On Turquoise Plato Block Discovery, buyers and sellers benefit by executing at midpoint, with both parties sharing price improvement inside the touch. Further, precision timestamping and immediate reporting adds to market transparency, enabling other traders to make more informed trading decisions.  

Today, we see a bifurcation of the market, with buy-side traders distinguishing between specialist block trading channels such as Turquoise Plato Block Discovery and continuously traded order books, where trade sizes average just €10,000, on European primary exchanges and multilateral trading venues, lit or dark.

In just four years, electronic block trading in Europe has come a long way. Turquoise Plato has come a long way too. In 2016, we were executing largely small-sized trades. But we have adapted quickly and consultatively to fulfil market demand and regulatory mandate.

Today, the majority of value on Turquoise Plato is now matched via Turquoise Plato Block Discovery. Electronic order book trading for blocks is a reality.

Overall, Turquoise Plato Block Discovery reported a record month in March with €19.33 billion in total value traded, an almost hundred-fold increase in 36 months. But our success in trading blocks is not confined to times of extreme volatility, with Turquoise Plato Block Discovery regularly supporting block trading during any period.

Even before recent volatility, Rosenblatt Securities identified Turquoise Plato as the leading midpoint and electronic block trading dark pool in Europe, with an average daily turnover of €793 million in December 2018, in the broker’s year-in-review report. For January 2020, Rosenblatt reported that Turquoise Plato executed €963.6 million per day on average, well ahead of CBOE CXE Dark (€668.9 million), the largest of our 20 other competing platforms across Europe. This compares with €1539.7 million per day during March – a new record via Turquoise Plato confirmed in Rosenblatt’s 23rd April 2020 ‘Let there be light’ publication, further consolidating the industry lead, thank you to our customers.

But we’re anything but complacent. Partnership and innovation have been key to our ability to help buy-side firms to protect alpha and support end-investors. We will continue to listen.

[1] FIX Trading Community EMEA Trading Conference, March 2016 (audience: 23% buy-side; 25% sell-side; 28% vendors; 24% venue operators and others).